Iceland’s exports: volcanic ash, Björk – and Haarde justice for Europe’s leaders?

Trial of Icelandic’s ex leader may set a precedent in Europe: it’s not what he did, but what he allegedly didn’t do that landed him in court

Brian Kenety 19.3.2012

Former PM of Iceland Geir Haarde (center) in a Reykjavik court at the start of his trial on March 5. He is the first world leader to face criminal charges over the 2008 financial crisis that affected much of the world economy. Haarde became a symbol of the bubble economy for Icelanders who lost their jobs and homes after the country’s main commercial bank collapsed in 2008, sending its currency into a nosedive and inflation soaring. foto: © ČTKČeská pozice

Former PM of Iceland Geir Haarde (center) in a Reykjavik court at the start of his trial on March 5. He is the first world leader to face criminal charges over the 2008 financial crisis that affected much of the world economy. Haarde became a symbol of t

The fallout from Eyjafjallajökull — that unpronounceable Icelandic volcano which two years ago spewed a cloud of ash from the British Isles to beyond the Baltics, closing airports as far away as Paris and Prague — was nothing when compared to the political ramifications the ongoing trial of Iceland’s former prime minister could potentially bring.

Apart from fish, perhaps the best-known export of the tiny island nation (population 320,000), the only NATO member state without a standing army, is Björk, the eccentric and similarly tiny singer. But now, a radical concept — that a politician can be held criminally accountable for failing to prevent an economic collapse — could prove to be Iceland’s most far-reaching export: Last week it became the first country to put a former leader on trial for mishandling the financial crisis.

Following the privatization of Iceland’s banking sector in the early 2000s, domestic lenders expanded aggressively in foreign markets, and consumers and businesses borrowed heavily in foreign currencies. Before Iceland’s three largest banks collapsed in September 2008 and were put into receivership — and here, the fallout also spread throughout Europe, with Prague financial institutions not immune — Icelandic banks’ extended loans and other assets exceeded the nation’s GDP more than tenfold.

After the collapse, the country’s Financial Supervisory Authority used permission granted under emergency legislation to take over the domestic operations of the banks (Glitnir, Landsbanki and Kaupthing). The stock exchange — which didn’t even exist before 1990 — lost 90 percent of its value, and in 2009 Iceland’s GDP contracted 6.9 percent.

© YouTubeGeir Haarde lectures about the case of Iceland and the global crisis, in June 2009

The charges against Geir Haarde, the country’s minister of finance from 1998 to 2005 and prime minister from 2006 until early 2009, who led the Independence Party government, include “serious neglect of his duties … in the face of major perils looming over Icelandic financial institutions and the state treasury, a danger he knew of, or should have known of.”

Closely watching the trial at Reykjavik’s Culture House will be citizens of other debt-ridden European countries, like Greece and Ireland, who have seen their savings and pensions evaporate — and the politicians who, like Haarde, failed to prevent the financial meltdown.

Also watching will be opposition politicians across Europe, who will look to seek how the courtroom drama plays politically, regardless of the verdict or the case’s merits. Not to mention the British and Dutch authorities, who are owed some $5.5 billion for compensating their respective citizens who lost deposits in Iceland’s online bank Icesave when parent bank Landsbanki failed in 2008. (When Icesave collapsed, the then UK Prime Minster Gordon Brown accused Gaarde of “illegal” behavior after Iceland said it could not give a guarantee to reimburse UK customers).

12 angry nations

Legendary Czech actor and satirist Jiří Voskovec, who parted ways with his long-time comedic partner Jan Werich after World War II to make his way in Hollywood, was among the “12 Angry Men” in the famous 1957 film about a dissenting juror (played by Henry Fonda) who slowly manages to convince the others that a seemingly black-and-white murder case is not as clear as it seems.

“If you want to vote ‘not guilty,’ then do it because you are convinced the man is not guilty, not because you’ve had enough. And if you think he is guilty, then vote that way! But don’t you have the guts to do what you think is right?” is one of the more memorable lines that Voskovec, as juror No. 11, was given.

That Oscar-winning film springs to mind for a number of reasons. The case against Haarde is highly political, anything but clear cut, and likely to last for at least two grueling weeks, with the court expected to take another four to six weeks to deliver a verdict. But it is the coincidental number 12 that actually spurred the analogy. As the US magazine Foreign Policy noted last month, Haarde was the first of 12 European leaders eventually taken down by the financial crisis. In chronological order, they are:

  1. Geir Haarde (Iceland), Feb. 1, 2009;
  2. Ivars Gomanis (Latvia), March 12, 2009;
  3. Ferenc Gyurcsány (Hungary), April 14, 2009;
  4. Viktor Yushchenko (Ukraine), Feb. 25, 2010;
  5. Gordon Brown (Britain), May 11, 2010;
  6. Brian Cowen (Ireland), March 9, 2011;
  7. José Sócrates (Portugal), June 21, 2011;
  8. George Papandreou (Greece), Nov. 10, 2011;
  9. Silvio Berlusconi (Italy), Nov. 16, 2011;
  10. José Luis Rodríguez Zapatero (Spain), Dec. 21, 2011; 
  11. Emil Boc (Romania), Feb. 6, 2012
  12. and finally, Iveta Radičová (Slovakia) who lost the elections this Saturday (March 10).

Iceland’s 2008–2011 financial crisis bankrupted the nation and contributed to the recession from which Europe has yet to emerge (volcanic ash being rather easier to tidy up after than multinational banks in receivership). The island nation’s banking crisis was “something of a preview of things to come for the rest of the continent” and Haarde’s government “the first to fall as a direct result of the economic crisis,” Foreign Policy noted.

Could the trial of the Icelandic leader — who stepped down on Feb. 1, 2009 following weeks of street protests — also set a precedent in Europe? Haarde is not charged with creating the bubble that burst so spectacularly in Iceland, nor of corruption, nor of criminally profiting from the policies he helped put in place. It’s not what he did, but rather what he allegedly didn’t do that has landed him in court.

In this regard, not one of the 12 deposed leaders proved immune from such accusations from an angry electorate. Perhaps they, like many of Iceland’s citizens, want a public confession of failure more than a conviction. Silla Sigurgeirsdóttir of the University of Iceland is of such an opinion. “The most important thing is not that he is convicted. The most important thing is that somebody says I’m sorry, I made a mistake, I neglected my duty,’” she told The National.

Dusting off the law books

In essence, Haarde is being accused of gross negligence, for which he faces up to two years in prison if convicted. His case in being heard by a special court established in 1905 in Iceland with a mandate to handle cases where Cabinet members are suspected of criminal behavior. Until this year, that court — the Landsdómur— was never before assembled. “I reject all accusations, and believe there is no basis for them,” Haarde told the court as he took the stand for the first time.

It was Iceland’s parliamentarians, as empowered by the country’s constitution and emboldened by the public outcry, who unearthed the obscure legislation from 1905, and sought to prosecute four of the principal political players (the move passed by a vote of 33 to 30).

‘Some people have said of course that it’s ridiculous to blame one man for this, and that’s a little bit true.’

“Some people have said of course that it’s ridiculous to blame one man for this, and that’s a little bit true. The Crash was of course the result of a lot of things, not just the fault of the man who was PM for a while,” MP Margre Tryggvadóttir, a literary theorist and editor elected to parliament in 2009, who was among those in favor of bring Haarde to trial, told The Guardian.

This past Friday marked day five of Haarde’s landmark trial; the outcome is far from certain, with the forensic evidence and testimony far more complicated to make sense of than what the “12 angry men” struggled with. That said, at this stage, few observers in Iceland are predicting a conviction, including some of the politicians who brought it about.

“[But] I think it's very important to get to the truth, even if just for regular Icelanders to feel that this was not okay,” Tryggvadóttir said, echoing a sentiment that many Icelandic commentators and everyday people have expressed in recent weeks: The trial is a necessary, whatever the outcome, in order to restore people’s faith in government, to help resurrect society, not just the economy.

Eyjafjallajökull and hard science

It is hard to ignore Eyjafjallajökull. The mountain itself, a stratovolcano, stands 1,651 meters at its highest point, and it has a yawning crater of some four kilometers in diameter. The volcano has erupted relatively frequently since the last glacial period, including twice in the spring of 2010. Scientists can predict such seismic events and assess the aftermath with great accuracy; the causes and effects of volcanic eruptions are not open to much debate (including the estimated €1.3 billion loss Eyjafjallajökull inflicted upon the airline industry).

Financial crises are another matter entirely. It would be hard to find two economists who agree entirely on all the inputs and outputs to be factored in — a fact that favors Iceland’s former prime minister. In his defense, Haarde denies having had specific information that he could have used to prevent the collapse (i.e. crucial input) while insisting that the result would have been worse still had he acted on recommendations that were put before him. ‘None of us realized at the time that there was something fishy within the banking system.’

“I had the belief that Iceland could become an international financial center,” Haarde told the specially convened court last week, as cited by The Guardian. “None of us realized at the time that there was something fishy within the banking system.” No doubt if they found themselves in Haarde’s shoes, the other European leaders named in the Foreign Policy article would make the same basic argument as he has.

Wrong man on trial?

Iceland’s current prime minister Jóhanna Sigur?ardóttir, who testified before the Landsdómur on Friday, said in his defense that that laws should have been put in place forcing the Iceland’s financial regulator, the FME, to break its confidentiality code and personally let her predecessor know of any potentially serious situations arising, according to live coverage of the trial by public broadcaster RÚV, summarized by the news server IceNews.

Previously a minister for social affairs in Geir’s government from 2007 to 2009, Sigur?ardóttir said he had not been in a position to do much to prevent Icelandic banks from collapsing in 2008 and described as “reprehensible” how positively the banks’ positions were described — by none other than the Central Bank of Iceland — in the lead up to the crash.

Sigur?ardóttir also said she did not recall ministers having been informed of an impending crash by then central bank governor, Daví? Oddsson — until a panicked meeting on Sept. 30, 2008. Indeed, news reports show that many Icelanders are less inclined to blame Haarde than they are to point a finger at Oddsson — who was prime minster for 13 years until 2004 — but charges against him collapsed. Now editor of Morgunbla?i?, Iceland’s main newspaper, he remembers things a bit differently, telling the court he had “warned the government, in the strongest possible terms, that the Icelandic banks were facing serious difficulties re-capitalizing themselves as the European banks no longer believed in their stability,” according to Reuters.

Another key witness on Friday was Gylfi Magnússon, a University of Iceland economist, who was drafted in to the minority government formed in February 2009 after Haarde had resigned, as an un-elected expert commerce and trade minister. According to IceNews, he told the court that the Central Bank of Iceland effectively went bankrupt in October 2008 when its board decided to lend €500 million Kaup?ing Bank in an effort to save it. Although the bank had said that amount represented only a fifth of its foreign capital reserves, in reality most of that money was not readily accessible, Magnússon testified.

‘You do not put prime ministers on trial for such complicated, structural, historically determined, multidimensional problems.’

The ripple effect

While many of these figureheads of ruling parties were defeated because of financial debacles, thus far none has shared the fate of Iceland’s former prime minister. Trials could happen in Greece — whose debt crisis has threatened to take down the eurozone itself — with the European Commission having accused Greek officials of having skewed economic data.

But as University of Athens political scientist Dimitri Sotiropolous told The National, Greece’s economic woes go much further back than do Iceland’s, and “You do not put prime ministers on trial for such complicated, structural, historically determined, multidimensional problems.”

Unless, of course, parliamentarians are inspired to find a way to do so.